Tips for Deferring Capital Gains Tax
In taxation, a capital gain results when you sell a non-inventory asset at an amount higher than its acquisition cost. On the other hand, if the sale proceeds are lower than the asset’s purchase price, a capital loss results. It is mandatory to report capital gain to taxation authorities. At times, capital gains taxes amount to large amounts, but you can defer or avoid them, which will limit your liability. The following guidelines will help you defer capital gains on the sale of your non-inventory assets.
Make certain town an asset for a minimum of a calendar year before thinking of its disposal. Note that, one year from the date of your intended sale, the tax rates could be lower, and that will translate into savings. Depending on your current tax rates, savings of up to 20 percent are possible.
If you sell investment or rental property; there is a legal loophole in place that allows you to defer capital gains taxes without worries. It applies when the proceeds from the sale of the said property are channeled back to the same type of investment within a specified period, which is usually 180 days. It is a complex exchange that may require you to find a tax expert to handle. The good thing is that it works for almost anyone who uses it to defer capital gains tax.
Deposit the sale proceeds into a tax-deferred or tax-exempt retirement fund. The trick here is to defer the payment of tax to a later date when a lower tax bracket will be in use. It is advisable to use this method in conjunction with another one if the proceeds are considerable because you could be prevented from depositing everything into this type of account by certain limiting rules.
It is possible to defer or avoid the payment of capital gains tax on a highly-valuable asset by handing it over to a charitable trust so that this party can dispose of it for you. Note that charitable trusts are exempt from taxation, a benefit that you will reap from this kind of a transaction. The trust will then transfer to you a specified portion of the asset’s cost over a certain precise period. All amounts that remain are utilized for charity purposes.
For someone with a dream of educating your child or grandchild, you can do so and still avoid paying capital gains tax at the same time. By depositing the proceeds of an asset sale to a college savings account, no capital gains tax liability will arise. It is also possible to get the same effect with a health savings account. Such an account is tax-exempt and is meant to cater to future medical expenses. The exception, however, only applies if you withdraw the funds for medical and not other purposes.